Do you need to improve your credit score to buy a home?
What does FICO stand for and what is it?
The name FICO comes from the company’s original name, the Fair Isaac Co, the first company to offer a credit-risk model with a score. It was often shortened to FICO and finally became the company’s official name several years ago. To create credit scores, they use information provided by one of the three major credit reporting agencies — Equifax, Experian or TransUnion.
Let’s clear up some common myths about credit scores, often called your FICO score, and the three bureaus: Experian, Equifax, and TransUnion, that provide your score
Credit Is Impossible to Get If You Don't Already Have Credit
Remember, we all have to start somewhere. When you submit an application to a lender to buy a home, the lender will look at four elements of a credit report: identification, account history, public records (bankruptcy filings and judgements) and inquiries (A credit inquiry is a request by an institution for credit report information from a credit reporting agency. Credit inquiries can be from all types of entities for various reasons. They are classified as either a hard inquiry or a soft inquiry). If a credit history has not been established, and you may need to have someone cosign or you could be added as an authorized user on an account like a Visa or Mastercard to create your own credit history. A good option for people just starting to build credit when they don't have a cosigner is a secured credit card, which requires users to put up cash as collateral. Once a credit history is established, it is important to maintain a good record of on-time payments and conservative credit use, most of our lenders recommend keeping the balance of your cards low in comparison to the max amount you can spend on a card. As you begin to begin a credit history, you will be evaluated periodically and, provided you are in good standing, your credit score will increase.
Once a Credit Score Is Bad, You Can’t Rebuild It
A credit report is really a credit history, and credit can be rebuilt over time. Your credit report doesn't just show the way things are today; it keeps a record of all credit opened in a your name. It will indicate which items are closed or inactive, but the history remains nonetheless. Late or missed payments can stay on your report for up to seven years. Rebuilding credit means paying on time, looking for better credit options, and learning more about money and credit, basically learning how to manage your credit. Additionally, the longer a credit history goes without negative information, such as late payments, the higher your score. The older negative information is in your timeline, the less significant it becomes to your credit score.
Checking a Credit Report Will Lower Your Score and Why IS MY FICO SCORE LOWER THAN MY “FREE App” Score?
If consumers access their own credit reports, it does not have any effect on their credit scores. Reviewing a credit report results in what is called a "soft pull," or "soft inquiry." Keep in mind you are best to check you scores at the 3 primary bureaus which are Experian, Equifax, and TransUnion. Using services like Credit Karma are not as accurate as a FICO score that is proved with data from the three credit bureau’s. These Free Credit score or monitoring apps are for-profit business that makes money by giving you a “free credit score" in exchange for learning more about your spending habits and charging companies to serve you targeted advertisements. They use their own modeling created independently from the credit bureaus, for example Credit Karma calls theirs “VantageScore.” So while many will argue their system is accurate, it’s not the industry standard; AND, the companies that will approve or deny loan applications are more likely to look at FICO scores.
Soft inquiries have no effect on your credit score as they are never considered as a factor in credit scoring models and are not disputable.
When you apply for credit, the lender will review your credit report, and a "hard inquiry" will be added. Hard inquiries are shown to other lenders because they may represent new debt that doesn't yet show on a credit report as an account. Hard inquiries can affect credit scores. Everyone should check their reports at least once annually. It's part of good credit management. However, don’t allow this to dissuade you from working with a lender to pull your credit and work with you to develop a plan for you to increase your score. Remember, we all have to start somewhere, and knowing where that somewhere is allows you to improve.
Education Level Can Affect Your Credit Score
Education level is not part of a credit report, so it has no bearing on credit scores. Information in credit reports pertains only to debt-related information. Therefore, loans, credit cards and payment history will be reported, as well as bankruptcy and civil judgments (debt owed through the courts). Information about income, investments or assets such as stocks or bonds will also not be in a credit report. Also, there is no information about savings accounts, checking accounts, certificates of deposit or other non-debt banking relationships. Additionally, under the Equal Credit Opportunity Act, a creditor's scoring system may not use race, gender, marital status, national origin or religion as factors.
Credit Is What Got Americans Into the Economic Meltdown
This is a much larger subject than we can get into here. Suffice it to say, there were many reasons and many important economic variables that caused a recession from December of 2007 to June of 2009, that actaully took many Americans through 2016 to regain pre-recession (November or Q4 2007) levels. However, in general spending too much is what can get people into financial trouble without an overall issue like a major economic recession. Credit is a financial tool that can be beneficial if used wisely, but if it is misused, it can get people into trouble. Everyone should set a budget to ensure they use their credit wisely and that they don't overspend.
Bankruptcy Protection Is Perfect for People With Really Large Amounts of Debt
Bankruptcy is a legal process that relieves a person of paying the debts. Depending on the kind of bankruptcy, the person may not repay any of the debt or might repay some of it. Bankruptcy can remain on a credit report for up to 10 years and can make it difficult to get credit. Consumers should investigate bankruptcy if they have no other options, but it's much better to work with a qualified credit counselor who may find better options for working with lenders to repay the debts. Settling the debts for less than originally agreed may be an option that will have a less long-lasting impact on a person's ability to get credit.
There's Only One Score That All Lenders Use to Determine Creditworthiness
There are many different credit scoring models used by lenders in the marketplace today. Generic scores may be used by many types of lenders and businesses to determine general credit risk. Custom credit scores are developed to predict risk for specific types of lending or for individual businesses, such as auto loans or retail debt. Custom scores are unique to that specific business or type of lending. But as above mentioned, the FICO score is a very common model uses in the mortgage industry.
The Government Owns the Credit Bureaus
Credit reporting agencies or bureaus are not owned by the government, although there are many laws that regulate how they must operate.
The Credit Bureaus Report People as Having Either Good or Bad Credit
Credit reporting companies do not make judgments about the information in credit reports. They simply compile information that is provided directly and voluntarily by consumer lenders. The information is likely comprised of credit cards, home or auto loans or other monthly payments. Lenders use that information to help them assess the risk of lending to you.
Once a Delinquent Loan or Credit Card Balance Is Paid Off, the Item Is Removed From a Credit Report
Negative information such as late payments, collection accounts and bankruptcies will remain on your credit reports for up to seven years. Certain types of bankruptcies stick around for up to 10 years. Paying off the delinquent account won't remove it from your credit report, but it will update the account to indicate it as "paid."
If Bills Aren't Paid on Time Because a Consumer Believes the Bill Is Incorrect, the Consumer Can't Be Held Accountable
If a bill is not paid in a timely manner, the delinquent payment may be reported as late to a credit bureau. If a bill was never received or was incorrect, it's best to contact the provider or company to resolve or discuss the matter prior to the bill becoming past due. So, in lieu of not paying the amount due, the best advice is to consult an attorney on how to proceed if you feel there is a discrepancy in a service, rental agreement, a medical bill, really any bill BEFORE the due date of that bill to develop a plan of action.
Paying Cash for Everything Can Help a Credit Rating
Credit use isn't bad; credit abuse is. Using cash for everything isn't better than using credit responsibly because you have to have some sort of history of responsible credit usage in order to establish solid credit histories and credit scores to make larger purchases where you will need financing. If various types of credit accounts are not established and maintained by a consumer, their scores won't be as good as someone with a long history of responsible credit use.
A Divorce Does Not Impact Credit Scores
Divorce proceedings don't affect credit reports or credit scores directly. However, the financial issues that are embroiled in the divorce process often involve joint credit accounts, and those very much affect credit history and credit scores.Accounts are reported for each individual associated with that account, so if one spouse is listed as a joint owner, cosigner or authorized user, he or she must deal with that account prior to the divorce. That means closing the account completely or ensuring that one name is totally removed from the account.
Many divorcing couples are confused by the role of the divorce decree. A divorce decree may specify who is responsible for accounts opened during the marriage, but it doesn't break the contracts with the lenders. If the spouse responsible under the divorce decree is unable or unwilling to pay and the contract has not been changed by the lender, the late payments still will appear on both credit reports and will have a negative impact on credit scores for both individuals.
Consult an attorney to make sure you have divided all of your financial accounts.
The Three Credit Reports and Credit Scores From the Three Credit Bureaus Will Be the Same
The opposite is almost a guarantee. It's likely that the credit reports from the three credit bureaus will be slightly different and, therefore, so will the credit scores. There are three primary reasons why this is so:
Not all accounts will be reported to all three credit-reporting agencies. Since reporting is a voluntary act, not all lenders report to all three.
Accounts on consumers' credit reports are not always updated at the same time. For example, an account at Experian may be updated in the credit report today, but the same information may not appear in the Equifax report until the following day or on the TransUnion report two days later.
Because the credit reporting companies' computer systems are different, the credit score formulas can be slightly different to work with a particular system. That difference in the formula can result in a difference in the scores.
Check Cards/Debit Cards Can Help Credit Reports and Scores
Check cards, more commonly referred to as debit cards, are nothing more than plastic access to a checking account. Since checking accounts aren't recognized as an extension of credit, they don't end up on credit reports.
Moving Credit Card Balances Around Will Help Hide Any Debt
It's impossible to hide credit card debt. If someone has 10 credit cards each with $1,000 balances or five credit cards each with $2,000 balances, it is still $10,000 in debt.
The Best Way to Improve Credit Scores Is to Pay off All Accounts and Close Them
It's actually partly true. Paying off all debts is one of the fastest ways to improve credit scores. Closing accounts, though, can hurt credit scores. One of the most important elements in credit scores is the proportion of total balances to the total credit limits. Paying off debts lowers that proportion, improving credit scores. However, closing accounts eliminates some of the available credit limits, making the balances appear to be higher compared to the overall limits. For example, a person who has $15,000 of credit available on multiple credit cards but only has a balance of $5,000 is only using 30 percent of available credit, which is good. However, if you close a $5,000 credit account because the credit card is not being used, the available credit amount drops to $10,000 and results in 50 percent of available credit being used — a level that can knock points off of your credit score.
Bad Credit Doesn't Impact Candidates Getting Hired
Federal law allows potential and current employers to view a modified version of a candidate's credit report for employment purposes, such as hiring and promoting, but the decision to include a credit check is left up to the individual employer. In certain industries, knowing that a candidate has a sound credit history is a very important part of the hiring and screening process. An Employment Credit report may include similar information about loans and credit cards that is listed in the credit report. It does not include year of birth, spouse reference, account number or credit score, which are irrelevant to hiring decisions.
If One Spouse Has Excellent Credit, the Other Doesn't Need to Worry Since They Can Just Use the Other One's Score to Apply for Loans
While there is no such thing as a credit score for couples, one person’s credit could affect the couple's ability to get credit. For instance, in cases where one person could not qualify alone, credit reports and scores for both people are considered when couples apply for a mortgage loan. So not keeping both parties credit in good standing might cause you to be faced with higher interest rates, fees or even being denied because one person has a poor credit history.
Good Credit Is Tied to How Much Money a Consumer Has in the Bank
How much money consumers have in the bank doesn't affect credit scores. A bank account does, however, affect credit scores if a consumer bounces checks and does not pay the money back. If the balance owed to the bank gets turned over to a collection agency, then that information will show up on a credit report. And, although you may not let the issue of insufficient funds (NSF is often the label on your statement) go long enough to be reported to a credit bureau to affect your credit score, the lender will request at least two months of banks statements, and having insufficient fund fees and notices on your account will impact the lender’s decision on your mortgage loan.
Again, we all have to start somewhere….We’d love for you start your plan with us. As your trusted advisors, we can help you review your needs and determine what your options are to purchase a home, and by working immediately with one of our trusted lending partners, we can put a plan together to make sure you can have the most buying power by following the lender’s recommendations to help improve your credit score. We can usually develop a plan with a timeline so that we can work to help you reach your real estate goals as quickly and as efficiently as possible. Reach out to us for a consultation anytime, we are here to help.
